Mind the gap: financing a world class city

Recent industry research puts the cost of Christchurch’s rebuild at $20bn. With the insurance industry covering 80 percent of this there remains a significant funding gap to build a truly world class city of the future.

Undoubtedly, private sector funding will have a role to play. The recently released recovery plan for the CBD emphasises that the private sector will be a critical partner to complement the funding available from the Council.

Private funding will help revitalise the city centre through priority projects such as a new convention centre, a metropolitan sports facility and a public transport interchanges.

Who is out there with money?

The global infrastructure markets currently remain dependent on commercial banks, and there is an overall dearth of syndication or bond market options for green-field infrastructure projects.

Since the Global Financial Crisis (GFC), the senior debt markets are constrained in terms of liquidity. It’s likely that Christchurch, in addition to commercial banks, will need to look to institutional investors such as superannuation funds, insurance companies and sovereign wealth funds to obtain the level of funding needed.

It is clear the most urgent need is to find an approach to coax this money into the infrastructure market in a way that delivers wide ranging benefits to the economy, investors, sponsors and users of the assets.

In the two public private partnerships (PPPs) nearing completion in New Zealand – both of which KPMG has been heavily involved in – the debt financing has primarily been sourced by major Australian and European banks. It is likely that these funders will have a major role in financing the Christchurch rebuild, but they will not be able to do it alone.

In the rest of this article we’ve outlined some of the additional sources of funding that could be used by Christchurch to bridge the funding gap.

Asian banks

Since the GFC, Europe and North America have focused on upgrading and maintaining much of their existing infrastructure. In Asia the focus has been on building a vast range of new assets and services to help maintain growth and drive up GDP. As a result, the ‘clout’ of the development banks in China, Korea, Japan and Singapore has grown significantly.

This has been particularly evident with the China Development Bank (CDB). Over the past few years, the CDB has invested several hundred billion US dollars in a range of infrastructure projects both inside and outside of the country. In fact, more than the aggregate funding support of the Asian focused multilateral organisations put together.

Other active banks include the Korean Development Bank and the Development Bank of Japan, who have both supported a range of infrastructure projects around the world.

Mature markets are becoming more attractive to Chinese investors, due to increasingly open competition and the introduction of PPPs in certain developing markets.

Christchurch represents an ideal opportunity for these banks – a mature economy with a pipeline of new projects that is not as constrained as North America and Europe in terms of risk and uncertainty.

Infrastructure funds

Before the GFC infrastructure funds were a key source of financing for a range of projects. This slowed dramatically during the crisis, but recently infrastructure funds have come back to the fore.

Over the past year the market has seen significant equity raising activity by many of the larger infrastructure fund managers: Energy Council Partners raised around US$4bn, Alinda Capital Partners closed a second fund of around US$4bn, and Goldman Sachs captured almost US$3bn.

Many of these funds are focused outside of Europe concerned about the ongoing debt crisis in the Eurozone which has created significant uncertainty in both country and currency risk. Given the scale of the opportunity, Christchurch could represent a strong prospect to these funds.

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